ECS 1501 Learning Unit 2 Learning Outcomes Once

ECS 1501 Learning Unit 2

Learning Outcomes Once you have studied this Learning Unit you should be able to: • describe three central economic questions • describe the major differences between traditional, command, market & mixed economies • describe the salient features of the market economy

2. 1 Different economic systems Read pg. 26 in your textbook and read Box 2 -1 • System is a network of parts which form a pattern • Economic system is a pattern of organisation aimed at solving the 3 central questions • Types of economic systems: Traditional System Command System Market System Mixed System

Traditional System Read pg. 26 in your textbook • Oldest system • All tasks and methods of production are prescribed by custom • Rigid system which is slow to adapt and resists innovation • Tend to be subsistence economies

Command System Read pg. 26 - 28 in your textbook • Central authority (the government) determines what should be produced and how it should be produced • Also called centrally planned systems • Characterised by state ownership of goods, services and factors of production (excl. labour) • Eg, North Korea is still largely based on central planning

Market System Read pg. 28 -30 in your textbook and read Box 2 -4 • Market = Any contact or communication between potential buyers and sellers of a good or service • There are conditions that must exist for something to be classified as a market • Individual preferences and decisions are communicated through the market mechanism such as the market price. • Market Price = Indicate to consumers what they have to sacrifice to obtain the goods and services concerned

Conditions for a Market 1. One potential buyer & one potential seller 2. Seller must have something to sell 3. Buyer must have means to purchase 4. Market price must be determined 5. Agreement must be guaranteed by law

Market System (cont. ) • Market capitalism = System in which most factors of production are privately owned • Characterised by individualism, private freedom and property, decentralised decision making etc • Economic activity is driven by self-interest • Answers the 3 central questions of economics • Economics agents respond to incentives • Competition is a NB feature • However, it includes a tendency to inequality and instability

Mixed System Read pg. 30 -33 in your textbook. • All economic systems are a mixture of the traditional, command market systems. • The South African economy is mixed, there is private property, private interest as well as a degree of government intervention. • Pure market capitalism: All factors of production are privately owned • In SA some enterprises are directly or indirectly owned by the state. Eg. Transnet, Eskom, SABC and The Post Office

Privatisation means private companies takes ownership of public enterprises.

Nationalisation • Nationalisation means the government takes ownership of private companies. – State-owned companies such as Eskom is NOT nationalisation! – Important: Nationalisation is the TRANSFER of private ownership to public ownership.

Mixed System • In pure market capitalism there is an absence of direct state interference in the economic decisions of producers and consumers • Pure market system all prices are established through market mechanisms • In pure market capitalism there is an assumption of perfect competition, no buyer/seller can influence the price of a good or service • When there is government intervention, imperfect competition is likely in certain sectors • SA does not have a pure market system, the system is mixed in which both the market mechanism and government intervention play a role.